Homeowners hear this line a lot: “You need to build up your home’s equity!” You may have also heard that you can use your home’s equity for everything from refinancing to consolidating debts. But what is home equity, and why is it so important? When should you use it? Home equity is the amount of […]
What is a piggyback loan and why would I get one?
A piggyback loan is when a borrower uses two mortgage loans simultaneously to buy a home, one “piggybacking” off of the other. The second mortgage can be in the form of a home equity loan or home equity line of credit (HELOC), while the first is your primary mortgage.
If you are considering a second mortgage, there are several pros and cons that you must take into account before applying. Piggyback mortgages can help you:
- · Avoid paying private mortgage insurance (PMI)
- · Pay fewer taxes (second mortgages are tax-deductible)
- · Avoid going over the conforming loan limit
- · Buy your next home before you sell your first
80/10/10 and 75/15/10 are the most common piggyback loan structures.
Avoid paying private mortgage insurance
One of the reasons a borrower may want a piggyback mortgage is to pay a low down payment without paying private mortgage insurance (PMI.) Typically when paying less than 20% down on a home, private mortgage insurance is applied to monthly payments by the lender. If the borrower can only afford a 10% down payment, the remaining 90% would require PMI. With a piggyback loan using the 80/10/10 structure, their payments break down as follows:
- The first mortgage finances 80% of the home
- The second mortgage finances 10% of the home
Second mortgages via piggybacks are tax-deductible
When you get a second loan via a piggyback, that loan’s interest is tax-deductible, which is a great way to lower your taxable income. Tax deductions are incentives for homeowners, and if you have a HELOC, those funds must be used towards the home.
Avoid going over the conforming loan limit
A piggyback mortgage is an alternative to a jumbo loan and going over the conforming loan limit. The home is purchased with the first loan being within conforming loan limits, and the smaller second loan doesn’t apply towards that limit. These loans may come with better rates than a jumbo.
Piggybacks via referral
It is possible to piggyback loans from two different lenders. For example, SmartMortgage does not offer home equity lines of credit at this time. Instead, we will provide you with your first loan and then refer you to another lender for the HELOC that closes simultaneously together.
These strategies are more advanced than your average mortgage, but well worth it if you find yourself in one of these situations. Your loan officer will work with you to explore your options, and help guide you to the mortgage structure that best meets your needs.